A merchant cash advance (MCA) isn’t for all businesses, but it’s an excellent option for some companies. Read on to learn if a MCA or Business Cash Advance (BCA) right for your business and how to choose a funder.
If your company is looking for financing options for your business operations, you have many options. Traditional banks, SBA loans, equipment loans, crowd funding, invoice factoring, hard money lenders and much more. But arguably most underutilized, vehicles of financing is a business cash advance (BCA), also identified as a merchant cash advance (MCA).
But with so many different funders with various rates and terms, how do you know which is the right one? We can assist you with understanding the process.
What exactly is a merchant cash advance?
A merchant cash advance provides business owners an advance of the monthly sales revenue regularly moving through the business account. A business cash advance (BCA) is not a loan, but rather an advance based upon the future revenues or credit card sales of a business.
In a typical situation, a contract between the lender and the business on specific terms like the advance amount, rate, holdback percentage, term, and total payback amount. Once these terms have been agreed to, the funds are transferred immediately into the companies business account, with the agreement that, the business promises to pay a percentage of future receivables.
The total payback is based on either a holdback percentage of the daily processing batches or a portion of the available daily balance in the businesses account.
BCA funders judge risk swiftly by using a different set of underwriting guidelines than a traditional bank has to go through. Merchant cash advance funders are interested in the history of daily receivables and credit card receipts, previous payment history and whether the business can pay back the advance promptly. Instead of using credit and collateral as primary decision points.
Advantages of a business cash advance
Now, that you have the basics of a merchant cash advance and how it works. Let’s look at some of the benefits connected with them.
- Higher approval rates
Business cash advances are frequently inquired for their high approval rates. Whether you have bad credit or are in a high-risk industry, it’s not going to prevent you from getting a BCA. Your credit score could be 500 and, as long as your receivables align, and your statements are good you could still get an advance.
- Collateral not required
There’s no collateral associated with a MCA advance. It’s a sales transaction, and nothing is reported to the credit companies. The funder is the one taking all of the risks.
- Flexible use of funds
Traditional lenders have restrictions on how you can use the funds they lend, with a MCA you can use the funds any way you want. Whether it’s marketing, expansion, advertising, buying equipment, paying workers, purchasing real estate, leases, or anything in between. It’s yours to spend how you please.
- Manageable payback
The easy payback process is the most attractive attribute for a MCA. Since the advance is revenue-based, you only have to pay back the advance in small portions either with your nightly credit card batches or small daily increments in relation to the volume of sales total.
5 tips for determining the best cash advance funder
Once you have decided on a merchant cash advance, you’ll discover that there are numerous providers. Below are some guidelines for choosing the best MCA provider:
- Compare rates and terms.
Since MCA funders are essentially giving you money in return for future sales, the rates are higher than traditional lenders. There is no collateral required, but they want the risk needs to be meriting. As a result, there are higher rates and fees. The rates can vary depending on a few factors, so do your research.
- Analyze industry experience.
Industry knowledge can be a big factor in being satisfied with your advance. Make sure the lender you’re considering has worked with other businesses in your industry– or with comparable revenue models.
- Ask for reviews and search reputation.
MCA providers may have a well-designed website and enticing content, but does the company live up to its claims? Communication is key, and you’ll be speaking with your lender a lot during your repayment process, which will be an easier experience if you are comfortable with your lender.
Research online and browse funder reviews. Ask around if you know business owners who have used MCA’s before for their own companies. Customer service is worth its weight in gold and can create an easy and manageable funding experience.
- Read the fine print.
It’s crucial that you read the entire contract carefully consider all terms before endorsing any contract with a funder.
MCA providers are technically not actual lenders, so merchants have little aid from government regulatory commissions should the relationship go astray. Be sure to review the entire contract for legal protection.
- Trust your instincts.
Think about whether an individual lender seems right for your business. Is there a genuine interest in your business, or does it feel like you are just another client?
Our purpose at Lendini is to release the potential of each small business by equipping them with appropriate and timely access to working capital. We use information, technology, and personal expertise to maximize the potential in every business we fund.